SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1997
-----------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIESEXCHANGE ACT OF 1934
For the transition period from TO
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Commission file number 1-12708
FRANKLIN SELECT REALTY TRUST
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(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3095938
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. BOX 7777, SAN MATEO, CALIFORNIA 94403-7777
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (650) 312-2000
------------------------------
N/A
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Former name, former address and former fiscal year, if changed since last
report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Common Stock Shares Outstanding as of June 30, 1997, Series A: 12,250,378
Common Stock Shares Outstanding as of June 30, 1997, Series B: 745,584
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN SELECT REALTY TRUST
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND DECEMBER 31, 1996
Unaudited
(In thousands, except per share amounts) 1997 1996
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ASSETS
Rental property:
Land $40,142 $38,286
Buildings and improvements 110,140 103,339
----------------------
150,282 141,625
Less: accumulated depreciation 19,397 17,583
----------------------
130,885 124,042
Cash and cash equivalents 3,864 2,558
Land held for development 4,077 -
Mortgage-backed securities,
available for sale 557 578
Deferred rent receivable 1,899 1,916
Deferred costs and other assets 2,318 2,204
----------------------
Total assets $143,600 $131,298
======================
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LIABILITIES AND STOCKHOLDERS' EQUITY
Notes and bonds payable $35,453 $22,745
Tenant deposits, accounts payable
and accrued expenses 1,318 1,197
Advance rents 10 26
Distributions payable 1,386 1,348
-----------------------
Total liabilities 38,167 25,316
-----------------------
Minority interest 9,293 9,329
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Commitments and contingencies (Notes 3 and 4)
Stockholders' equity:
Common stock, Series A, without par value;
stated value $10 per share; 110,000 shares
authorized; 12,250 issued and outstanding 103,161 103,161
Common stock, Series B, without par value;
stated value $10 per share; 2,500 shares
authorized; 746 shares issued and outstanding 6,294 6,294
Unrealized loss on mortgage-backed securities (28) (36)
Accumulated distributions in excess of net income (13,287) (12,766)
-----------------------
Total stockholders' equity 96,140 96,653
-----------------------
Total liabilities and stockholders' equity $143,600 $131,298
=======================
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN SELECT REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
(In thousands, except per share amounts) 1997 1996 1997 1996
- --------------------------------------------------------------------------------------
REVENUE:
<S> <C> <C> <C> <C>
Rent $4,450 $3,447 $8,546 $6,732
Interest, dividends, and other 52 166 88 355
----------------------------------------
Total revenue 4,502 3,613 8,634 7,087
----------------------------------------
EXPENSES:
Interest 733 153 1,325 314
Depreciation and amortization 982 830 1,954 1,655
Operating 1,019 854 1,848 1,684
Related party 372 310 709 560
Consolidation expense - 244 - 706
General and administrative 140 144 302 337
Minority interest 161 - 322 -
----------------------------------------
Total expenses 3,407 2,535 6,460 5,256
----------------------------------------
NET INCOME $1,095 $1,078 $2,174 $1,831
========================================
Net income per share, based on the
weighted average shares outstanding
of Series A common stock of 12,250
and 14,145 for the three- and six-month
periods ended June 30, 1997, and 1996,
respectively $ .09 $ .08 $ .18 $ .13
========================================
Distributions per share, based on the
weighted average shares outstanding
of Series A common stock of 12,250
and 13,651 for the three-month periods
ended and 12,250 and 13,898 for the
six-month periods ended June 30, 1997
and 1996, respectively $.11 $ .11 $ .22 $ .22
========================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN SELECT REALTY TRUST
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Unaudited
(In thousands) 1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $2,174 $1,831
----------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,036 1,655
Minority interest 322 -
Decrease in deferred rent receivable 17 29
Increase in other assets (143) (76)
Increase (decrease) in tenant deposits,
accounts payable and accrue expenses 61 (128)
Decrease in advance rents (16) (16)
----------------------
2,277 1,464
----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,451 3,295
----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of rental property (12,613) -
Improvements to rental property (121) (275)
Leasing commissions paid (190) (210)
Disposition of mortgage-backed securities 29 615
----------------------
Net cash (used in) provided by
INVESTING ACTIVITIES (12,895) 130
----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under notes and bonds payable 15,178 -
Repayment of notes and bonds payable (2,470) (36)
Payoff of seller carryback note - (480)
Payment of loan costs (3) -
Dissenting shareholders' interest paid - (8)
Distributions paid to limited partners (298) -
Distributions paid to stockholders (2,657) (4,032)
----------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 9,750 (4,556)
----------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,306 (1,131)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 2,558 6,186
----------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $3,864 $5,055
======================
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN SELECT REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
Unaudited
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements of Franklin Select Realty
Trust (the "Company") have been prepared in accordance with generally
accepted accounting principles applicable to interim financial information
and pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation have been included. The Company presumes
that users of the interim financial information herein have read or have
access to the audited financial statements for the preceding fiscal year and
that the adequacy of additional disclosure needed for a fair presentation may
be determined in that context. Accordingly, footnote disclosure which would
substantially duplicate the disclosure contained in the Company's 1996 Annual
Report on Form 10-K has been omitted.
NOTE 2 - NET INCOME PER SHARE
On May 7, 1996 Franklin Real Estate Income Fund ("FREIF") and Franklin
Advantage Real Estate Income Fund ("Advantage") merged into the Company (the
"Merger"). On November 1, 1996 in connection with the merger, the Company
repurchased shares of FREIF and Advantage common stock, equivalent to
approximately 1.9 million shares of the Company's common stock, which was
held by certain FREIF and Advantage shareholders who dissented from the
merger.
For purposes of calculating net income per share for the periods ended June
30, 1996, the weighted average shares outstanding of Series A common stock
has been calculated assuming the shares attributable to dissenting
shareholders (equivalent to approximately 1.9 million shares of the Company's
common stock) were converted into the Company's common stock and were
outstanding for the period.
NOTE 3 - LITIGATION
On December 2, 1996, two stockholders, for themselves and purportedly on
behalf of certain other minority stockholders of Advantage, filed a purported
class action complaint in the California Superior Court for San Mateo County
against Advantage, its directors, the Advisor, Franklin Resources, Inc. and
the Massachusetts State Teachers' and Employees' Retirement Systems Trust
("MASTERS"). The complaint alleges that defendants breached fiduciary duties
to plaintiffs and other minority stockholders in connection with the purchase
by Franklin Resources, Inc. in August 1994 of MASTERS' 46.6% interest in
Advantage and in connection with the Merger of Advantage into the Company in
May 1996, which was approved by a majority of the outstanding shares of each
of the three companies. Plaintiffs also allege that defendants misstated
certain material facts or omitted to state material facts in connection with
these transactions. The complaint includes a variety of additional claims,
including claims relating to the investment of Advantage assets, the
suspension of the dividend reinvestment program, the allocation of
merger-related expenses, revisions to the investment policies of Advantage,
and the restructuring of the contractual relationship with the Advisor.
Plaintiffs seek damages in an unspecified amount and certain equitable
relief. The defendants deny any wrongdoing in these matters and intend to
vigorously defend the action. No discovery has yet been propounded in the
case. As a result of the pleadings filed by the various defendants,
including the Company, several of the plaintiffs' claims may be removed from
the action, and the plaintiffs will be filing an amended complaint to address
the court's anticipated response to such filings.
FRANKLIN SELECT REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
Unaudited
NOTE 3 - LITIGATION (Continued)
On June 3, 1997, Herbert S. Hodge, Jr., on behalf of himself and certain
other shareholders of FREIF, filed an alleged class action complaint in the
California Superior Court for San Mateo County against the Company, certain
of its directors, the Company's advisor, Franklin Properties Inc., Franklin
Resources Inc., certain of the Company's directors and Bear Stearns Co. Inc.
The complaint alleges that defendants breached fiduciary duties to plaintiff
and certain other shareholders in connection with the merger of FREIF into
Franklin Select Realty Trust in May 1996. Plaintiff also alleges that
defendants misstated certain material facts or omitted to state material
facts in connection with this transaction. Plaintiff seeks damages in an
unspecified amount. The defendants deny any wrongdoing in these matters and
intend to vigorously defend the action. All defendants, including the
Company, have challenged the complaint. Those filings have been consolidated
for hearing in front of the same judge who was assigned by the court to hear
pre-trial matters in the case stated above.
Management does not believe that the outcome of these matters will have a
material adverse affect on the Company's financial condition or results of
operations.
NOTE 4 - PURCHASE OF REAL PROPERTY
On June 25, 1997, the Company acquired a 12.5 acre parcel of undeveloped land
located in Rancho Cordova, California for $4.08 million. The acquisition was
financed by a $4.1 million draw under the Company's line of credit with Bank
of America. The Company intends to enter into a development agreement with
the seller, who is a Sacramento, California area developer, to develop the
land with a five story office building containing approximately 162,000
square feet. The land purchase agreement provides that if the parties do not
execute a development agreement by September 23, 1997, then the seller has
the option, for the following 90 days, to repurchase the parcel from the
Company at a price equal to the sum of the Company's purchase price, its
closing costs, interest expense at an annual rate of 10%, and $100,000.
On April 1, 1997, FSRT, L.P., a majority-owned subsidiary of the Company,
acquired an industrial R&D building located in Fremont, California, for $8.51
million. The acquisition was financed by a $8.6 million draw under the
Company's line of credit with Bank of America. On July 30, 1997, the Company
refinanced $5.1 million of the borrowings under the line of credit with a
fixed rate loan provided by First Nationwide Life Insurance Company in the
amount of $5.16 million. The new debt is collateralized by the R&D building
and bears monthly principal and interest payments at 8.47% per annum, based
on a 25-year amortization schedule, with the remaining principal maturing on
August 1, 2004.
NOTE 5 - STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings per Share" ("FAS 128")
and No. 129 "Disclosure of Information About Capital Structure" ("FAS 129").
FAS 128 specifies the computation, presentation and disclosure requirements
for earnings per share for entities with publicly held common stock. In
summary, FAS 128 would require the Company to present its earnings per share
on a basic and diluted basis effective for financial statements issued for
periods ending after December 15, 1997. The Company has not yet determined
what effect, if any, this pronouncement will have on the Company's
consolidated financial statements.
FRANKLIN SELECT REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
Unaudited
NOTE 5 - STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS (Continued)
FAS 129 consolidates the existing disclosure requirements regarding an
entity's capital structure and becomes effective for financial statements
issued for periods ending after December 15, 1997. The Company has not yet
determined what effect, if any, this pronouncement will have on the Company's
consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("FAS
130") and No. 131 "Disclosures of Segment Information" ("FAS 131"). FAS 130
establishes the disclosure requirements for reporting comprehensive income in
an entity's annual and interim financial statements and becomes effective for
the Company for the fiscal year ending December 31, 1998. Comprehensive
income includes unrealized gains and losses on securities currently reported
by the Company as a component of stockholders' equity which the Company would
be required to include in a financial statement and display the accumulated
balance of other comprehensive income seperately in the equity section of the
consolidated balance sheet. The Company has not yet determined what effect,
if any, this pronouncement will have on the Company's results of operations.
FAS 131 establishes standards for determining an entity's operating segments
and the type and level of financial information to be disclosed. FAS 131
becomes effective for financial statements issued for periods ending after
December 15, 1997. The Company has not yet determined what effect, if any,
this pronouncement will have on the Company's consolidated financial
statements.
FRANKLIN SELECT REALTY TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion is based primarily on the consolidated financial
statements of the Company for the period ended June 30, 1997. The
information should be read in conjunction with the accompanying consolidated
financial statements and the notes thereto.
When used in the following discussion, the words "believes," "anticipates"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties which could
cause actual results to differ materially from those projected, including,
but not limited to, those set forth in the section entitled "Potential
Factors Affecting Future Operating Results," below. Readers are cautioned
not to place undue reliance on these forward-looking statements which speak
only as of the date hereof. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996
Total revenue for the three- and six-month periods ended June 30, 1997
increased $889,000, or 25%, and $1,547,000, or 22%, compared to the same
periods in 1996. These increases were primarily due to rental revenue
provided by the LAM Research Buildings and the Tanon Building acquired in
October, 1996, and April, 1997, respectively. The increase in rental revenue
for the periods reported was also due to an increase in the average portfolio
occupancy rate of the other seven properties from 92.1% to 97.8% and from
92.3% to 96.9%, respectively. The increase in rental revenue was partially
offset by a decrease in interest revenue due to the sale of mortgage-backed
securities in the fourth quarter of 1996.
Total expenses for the three- and six-month periods ended June 30, 1997,
increased $872,000, or 34%, and $1,204,000, or 23%, respectively, when
compared to the same periods in 1996. The increases for the periods
reported were primarily as a result of increases in interest, depreciation
and amortization, and minority interest expenses related to the LAM Research
Buildings. These increases were partially offset by a decrease in
non-recurring expenses related to the Merger.
Related party expense for the three- and six-month periods ended June 30,
1997 increased 20% and 27%, respectively, compared to the same periods in
1996, primarily as a result of an increase in advisory fees as a result of
the acquisition of the LAM Research Buildings, and the Tanon Building and the
adoption of the Company's advisory agreement by the two REITs that merged
with the Company in May, 1996. Prior to the Merger, the REITs operated under
advisory agreements containing different methods of compensation to the
Advisor.
The decrease in general and administrative expense for the three- and
six-month periods ended June 30, 1997 as compared to the same periods in 1996
was a result of decreases in legal fees and directors' and officers'
insurance premiums and due to merger related expenses reported in 1996 of
$33,000 and $72,000, respectively. These decreases were partially offset by
increases in transfer agent expense and accounting expense.
Net income increased during the 1997 periods primarily as a result of an
increase in rental income and a decrease in consolidation expenses, partially
offset by increased property operating expenses and interest expense relating
to recently acquired properties.
FRANKLIN SELECT REALTY TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, cash and cash equivalents aggregated $3,864,000 which the
Company believes is adequate to meet its short-term operating cash
requirements. The Company also has access to a revolving line of credit in
the amount of $25 million and holds $557,000 in mortgage-backed securities.
At June 30, 1997, the outstanding balance under the Company's credit facility
was $12.7 million.
On April 1, 1997, the Company acquired an R&D building located in Fremont,
California and on June 25, 1997, the Company acquired a 12.5 acre parcel of
undeveloped land located in Rancho Cordova, California. The Company acquired
the properties for a purchase price of $8.51 million and $4.08 million,
respectively, utilizing a portion of the line of credit facility available to
the Company. Borrowings under the line of credit bear interest at the London
Interbank Offered Rate plus 1.90%, or at Bank of America's Reference rate at
the Company's option. At June 30, 1997 the weighted average interest rate of
borrowings under the line of credit was 7.72%. On July 30, 1997, the Company
refinanced $5.1 million of the borrowings under the line of credit with a
fixed rate loan provided by First Nationwide Life Insurance Company in the
amount of $5.16 million. The new debt is collateralized by the R&D building
and bears monthly principal and interest payments at 8.47% per annum, based
on a 25-year amortization schedule, with the remaining principal maturing on
August 1, 2004.
Management continues to evaluate properties for acquisition by the Company.
The Company expects to fund the cost of acquisitions, capital expenditures,
costs associated with lease renewals and reletting of space, repayment of
indebtedness, and development of properties from (i) cash flow from
operations, (ii) borrowings under its credit facility and, if available,
other indebtedness (which may include indebtedness assumed in acquisitions),
(iii) proceeds from the sale of the Company's equity securities, and (iv) the
issuance of partnership interests in connection with acquisitions. The
Company's operating cash flow has been its principal source of capital for
minor property improvements, leasing costs and the payment of quarterly
distributions.
Net cash provided by operating activities for the six-month period ended June
30, 1997 was $4,451,000, or $1,156,000 more than the same period in 1996.
The increase in cash flow provided by operating activities is primarily
attributable to the acquisition of the Lam Research Buildings and the Tanon
Building, and a decrease in consolidation expense.
Net cash used in investing activities and financing activities increased
$13,025,000 and $14,306,000, respectively, when compared to the same period
in 1996 primarily as a result of the acquisition of the Tanon Building and
the undeveloped land.
On July 1, 1997, the Company entered into an agreement to sell the Carmel
Mountain Shopping Center in San Diego, the Glen Cove Shopping Center in
Vallejo, California, and the Mira Loma Shopping Center in Reno, Nevada to an
unrelated third party. The transaction was subsequently terminated by the
purchaser as allowed by the contract. The offer from the buyer was
unsolicited, however, management believed that the terms of the agreement to
purchase the properties were attractive and warranted the sale of the
assets. Management is not actively marketing the retail assets for sale.
Management does not believe that the outcome of the litigation described in
Note 3 to the accompanying financial statements will have a material adverse
affect on the Company's financial condition or results of operations.
FRANKLIN SELECT REALTY TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Management believes that the Company's sources of capital as described under
Liquidity and Capital Resources are adequate to meet its liquidity needs in
the foreseeable future.
IMPACT OF INFLATION
The Company's policy of negotiating leases which incorporate operating
expense "pass-through" provisions is intended to protect the Company against
increased operating costs resulting from inflation.
CASH DISTRIBUTION POLICY
Distributions are declared quarterly at the discretion of the Board of
Directors. The Company's present distribution policy is to at least annually
evaluate the current distribution rate in light of anticipated tenant
turnover over the next two or three years, the estimated level of associated
improvements and leasing commissions, planned capital expenditures, any debt
service requirements and the Company's other working capital requirements.
After balancing these considerations, and considering the Company's earnings
and cash flow, the level of its liquid reserves and other relevant factors,
the Company seeks to establish a distribution rate which:
i) provides a stable distribution which is sustainable
despite short-term fluctuations in property cash
flows;
ii) maximizes the amount of cash flow paid out as
distributions consistent with the above listed
objective; and
iii) complies with the Internal Revenue Code requirement
that a REIT annually pay out as distributions not less
than 95% of its taxable income.
During the six month period ended June 30, 1997, the Company declared
distributions totaling $2,695,000.
FUNDS FROM OPERATIONS
The Company considers funds from operations to be a useful measure of the
operating performance of an equity REIT because, together with net income and
cash flows, Funds from operations provides investors with an additional basis
to evaluate the ability of a REIT to support general operating expense and
interest expense before the impact of certain activities, such as gains and
losses from property sales and changes in the accounts receivable and
accounts payable. However, it does not measure whether income is sufficient
to fund all of the Company's cash needs including principal amortization,
capital improvements and distributions to stockholders. Funds from
operations should not be considered an alternative to net income or any other
GAAP measurement of performance, as an indicator of the Company's operating
performance or as an alternative to cash flows from operating, investing or
financing activities as a measure of liquidity. As defined by the National
Association of Real Estate Investment Trusts, funds from operations is net
income (computed in accordance with GAAP), excluding gains or losses from
debt restructuring and sales of property, plus depreciation and amortization,
and after adjustment for unconsolidated joint ventures. The Company reports
funds from operations in accordance with the revised NAREIT definition. The
measure of funds from operations as reported by the Company may not be
comparable to similarly titled measures of other companies that follow
different definitions.
FRANKLIN SELECT REALTY TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
FUNDS FROM OPERATIONS (Continued)
For the Six Months Ended
Funds from Operations June 30,
(In thousands) 1997 1996
- -------------------------------------------------------------------------
Net income $2,174 $1,831
Add: Depreciation and amortization 1,954 1,655
- -------------------------------------------------------------------------
Funds from Operations $4,128 $3,486
=========================================================================
The primary difference between the periods reflects the changes in net income
as discussed under "Results of Operations".
POTENTIAL FACTORS AFFECTING FUTURE OPERATING RESULTS
DECLINE IN INTEREST INCOME, LOSS ON SALE OF MORTGAGE-BACKED SECURITIES
In prior years, net income has been positively affected by interest income
that the Company earned on its investments in mortgage-backed securities. In
addition, the Company periodically incurred losses upon the sale of certain
of the securities. Late in 1996, the Company liquidated substantially all of
its mortgage-backed securities in order to provide funds to repurchase a
portion of its outstanding common stock. Therefore, the Company does not
anticipate generating significant amounts of interest income, or losses on
the sale of mortgage-backed securities, in future years. The repurchase of
the Company's common stock was not detrimental to the Company's operating
results in 1996 calculated on a per share basis, due to the related decline
in the number of shares outstanding.
LEASING TURNOVER
In connection with any lease renewal or new lease, the Company typically
incurs costs for tenant improvements and leasing commissions which will be
funded first from operating cash flow and, if necessary, from cash reserves
or the line of credit. In addition, while the Company has historically been
successful in renewing and releasing space, the Company will be subject to
the risk that leases expiring in the future may be renewed or released at
terms that are less favorable than current lease terms.
LEASING TURNOVER - CONTINENTAL CASUALTY COMPANY
The Company completed the renewal of the Continental Casualty Company's
("CNA") lease at Fairway Center. The CNA lease, which covers 74,500 square
feet, has been renewed for a period of five years commencing November 1,
1997. Annual rental income to be received under the new lease will decline
approximately $430,000 compared to the existing lease due to lower market
rental rates. Management believes the rental rates of the other tenants at
the Fairway Center are substantially at market rates. The Company will incur
costs for tenant improvements and leasing commissions related to the CNA
lease totaling approximately $970,000 which the Company expects to fund from
its cash reserves during the third and fourth quarters of 1997.
FRANKLIN SELECT REALTY TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
POTENTIAL FACTORS AFFECTING FUTURE OPERATING RESULTS (Continued)
LEASING TURNOVER - DATA GENERAL BUILDING
Over the next two years, the Company's leasing exposure at the Data General
Building consists of two leases each covering approximately 48,000 square
feet, which expire in November, 1997 and January 1999. The Company believes
that the effective rental rate that is provided by the lease expiring in 1997
is substantially at the current market rate. However, the lease expiring in
1999 carries a triple net rental rate that is equivalent to approximately
$28.00 per square foot on a full service basis. Compared to the estimated
current market rate of $19.80 per square foot, this lease provides overmarket
rent of approximately $394,000 annually, or 2% of the Company's current
annual revenue based on annualizing the total revenue for the quarter ended
June 30, 1997. It is impossible to predict the market rental rate in 1999;
however, the Company expects that when this lease expires, the rental income
related to this space will be less than $28.00 per square foot regardless of
whether the lease is renewed or new leases are signed. The Company will also
incur costs for tenant improvements and leasing commissions related to both
spaces upon the renewal or re-leasing of the spaces, however, the amounts are
unknown at this time.
FRANKLIN SELECT REALTY TRUST
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Not applicable
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended June 30, 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN SELECT REALTY TRUST
By: /S/ DAVID P. GOSS
David P. Goss
Chief Executive Officer
Date: AUGUST 11, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
REGISTRANT'S FINANCIAL STATEMENTS FOR THE QUARTER ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,864
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0
0
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